This Week's FOMC Tapering Start Time: A Critical Focus
Shock Inevitable Following Past Tapering Patterns
Dollar Strength May Accelerate Capital Outflow... "Diversify Investments in Low-Volatility Assets"
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[Asia Economy Reporter Ji Yeon-jin] This month, the domestic stock market is expected to face the United States' ‘Tapering’ (reduction of asset purchases) as the biggest variable. Although the positive factor of economic improvement under ‘With Corona’ and the negative factor of global liquidity reduction are intertwined, there are growing concerns that if tapering is officially announced this week, the strengthening of the dollar could accelerate capital outflows from the domestic stock market.
On the 1st, the KOSPI started with a rebound after four days. The KOSPI opened at 2,984.18, up 0.45% from the previous day, and surpassed the 2,990 mark by 10 a.m. last week, as the U.S. stock market hit a new all-time high again, fueling investment sentiment among institutions and individuals. However, foreigners have continued a four-day streak of net selling. Foreign investors sold stocks worth 3.9 trillion won last month, turning to net selling again after a month.
In the financial investment industry, the focus is on whether the U.S. Federal Open Market Committee (FOMC), which will be held over two days starting on the 2nd (local time), will announce the start of tapering. Market experts expect the U.S. Federal Reserve (Fed) to begin tapering this month and complete it by mid-next year.
When the Fed started tapering in January 2014 after the 2008 global financial crisis, the S&P 500 index fell by 3.6%, while global, developed, and emerging market stocks dropped by 4.1%, 3.8%, and 6.7%, respectively. The initiation of the exit strategy, which reduced liquidity, led to expectations of a stronger dollar and rising market interest rates, lowering the expected returns of the stock market. Similar trends are feared to emerge during the Fed’s tapering process this time as well.
Moon Nam-jung, a researcher at Daishin Securities, said, "Until tapering is implemented, the positive effects of the U.S. infrastructure investment bill will spread to the stock market, but once tapering is confirmed, a short-term decline in the stock market is inevitable." He added, "Assuming tapering begins as early as mid-this month, it is necessary to use a ‘low-volatility strategy’ that diversifies investments into products composed of stocks with maximized pre-implementation profits and low post-implementation price volatility." Kang Hyun-ki, a researcher at DB Investment Securities, also forecasted, "The possibility of further energy price increases this winter raises concerns that the tightening of liquidity policies could intensify, which will act as downward pressure on the overall stock market."
Some analysts predict that the downside pressure on the domestic stock market will not be significant, based on the U.S. stock market’s record-high streak and the solid performance of domestic companies. Seo Jeong-hoon, a researcher at Samsung Securities, said, "The fortunate part is that corporate earnings damage due to inflation is limited, so the KOSPI is likely to fluctuate around the 3,000 level." He added, "Since the upside of the index is limited, it is necessary to consider price factors first, and a rebound in large-cap stocks such as electrical and electronics, automobiles, and materials, which experienced relatively large declines due to foreign net selling, can be expected." Han Ji-young, a researcher at Kiwoom Securities, noted, "It is important to pay attention to the coexistence of positive factors such as the past learning effect of tapering risks, continued earnings momentum, and seasonal effects due to year-end consumption expectations." She recommended, "Since the environment is expected to be more sensitive to positive factors than negative ones, increasing stock exposure in November is advisable."
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